Vringo: The Calm Before The Storm

Over the course of the last several months, the Vringo (NASDAQ:VRNG) trial vs. Google (NASDAQ:GOOG), AOL (NYSE:AOL), Target (NYSE:TGT), Gannet (NYSE:GCI), and IAC/Interactive (NASDAQ:IACI) (collectively, "Defendants") has displayed many ups and downs as you may already know. Vringo as a trade or investment by many has been a very speculative play, and, well, volatility comes with the territory.

To Recap

On Nov. 6, 2012, Vringo was awarded a jury verdict, and AOL et al. lost. Since then, we have experienced several post-trial motions. Google has shown the world that it won't take any litigation sitting down, and this trial process is much like the VirnetX patent lawsuit that is currently ongoing with Apple (NASDAQ:AAPL). Meaning, lots of lawyering, posturing, motions, delays and even more lawyering despite the fact that these companies are allegedly -- and maybe even willfully -- using patents owned by much smaller firms. Have these smaller firms held up through with their conviction for an overall victory? Yes, I think they have done a tremendous job despite the hurdles.

Here Are the Facts Regarding Vringo

Last week the USPTO rejected three out of four Google arguments against Vringo '664 patent, which shows that Google is losing a significant advantage regarding the best of Culliss and Bowman. The '420 patent appears to be solid, and with the two validated patents this could bring more action against other willful search engines down the road.

Google did get the Rose argument for patent review, but this patent review will be long and egregious to say the least. But by then we will be looking way back in our rear view mirror to see what happens there.

In patent law, some experts have written that in order to nullify court rulings, under review, the USPTO would have to invalidate not one or two or some of the 14 claims of infringement, but all of them (all the claims infringed on the two patents of this case). And before the appeal judgment will be out. Again, I must say that this door is closing very fast for Google. The USPTO risk has greatly diminished and Google knows it.

The Jan. 23, 2013, delay granted by the judge regarding the royalties that Google must pay may simply be a re-aligning of priorities by the judge. It certainly makes sense. Processes have to be lined up. It would be hard to rule on royalties when there are serious discrepancies on his desk that he will undoubtedly address very soon.

This brings me to the strong belief that the judge in this case may be leaning toward ruling in favor of the Vringo Post Trial Motion Request for a Rule 59 trial despite pressing the stubborn parties to settle all along. This would be a brief trial to correct the already ruled on damages verdict given by the jury, which many believe is flawed.

The Risk for Google

If the already rejected laches is re-visited and Vringo wins, they could easily expect to win $500M in past damages (with this 1-day trial or on appeal if driven there by an unsatisfactory ruling). In addition, they may also win substantial future royalties for several years to follow. This is familiar ground for Vringo as this potential was priced into the stock at the $4.00 - $5.50 level. Subsequent to the laches ruling, Vringo's loss in stock value to the $3's occurred when Federal Judge Raymond Jackson ruled to exclude the laches damages prior to 2011. This certainly came as an unexpected blow to Vringo.

On Thursday, Jan. 24, 2013, some information surfaced and after speaking to the company, they confirmed that after their annual board meeting, they will be attending a "dinner" with institutional investors, hosted by brokerage firm Craig-Hallum in NYC on Jan. 31. Companies often meet with investors, have road shows and attend dinners so this is nothing to be alarmed about. The company says that they have no immediate need to raise any additional capital given their strong $60M cash position.

Lastly, today is the last day for both Vringo and Google to file opposition briefs in this case. Expect PACER documents to follow into the evening.

Summary

My position remains that while nobody likes to lose, sometimes one must set all egos aside and face reality. The two Vringo patents; U.S. Patent Nos. 6,314,420 (the "'420 Patent") and 6,775,664 (the "'664 Patent") (collectively, the "Patents") have been validated by a court of law, and now the (alleged) infringers are seemingly "willful" at this juncture. Licensing fees must be paid and will be paid in due time. The judge should rule favorably in due time, as I outlined here.

On appeal the damages award could be corrected, and 3x damages are a possibility if Vringo seeks willful infringement next time around. Some have speculated that Vringo may be asking $1B or maybe even more in overall damages excluding running royalties that could very well award upward of $2B in the long run. Google may be risking much higher damages if they keep up their stubborn position despite the judges continuous delays in hopes that they might come to their senses and settle.

Looking Further Out

The next big positive announcements after the post-trial motions should relate to the lawsuits that have been filed on China telecom company, ZTE in the German courts. Remember that the German courts are far more brutal than the US court system. Injunctions against infringers are a serious factor in Europe and injunctions can stop a business in its tracks. Would ZTE risk this? I don't think so.

With respect to these new lawsuits, no one is really seeing the true value of Vringo's patent portfolio here in my opinion. Educating the market does take time. Now, ask yourself, wouldn't the 500 Nokia (NYSE:NOK) patents that Vringo acquired be more valuable when enforced than the two Google patents in question? Logic and my gut says, yes. These 500 acquired Nokia patents may have greater value than the two Google patents. As the market gets more educated about the legal direction and strategy by the Vringo legal team, the stock should react in a positive manner. Right now the stockholders are literally driving in the fog. That's why the stock is in the low $3.00s.

Lastly, one has to think about what's on the Google legal team's mind. Does the fiduciary responsibility come into play? At what point will they tell their client(s): "We're done with the post-trial risk-loss mitigation scenarios and our findings suggest we should offer a settlement for $1B." This may be the final solution or a higher number as the litigation plays on to the success of Vringo. This scrappy fighter Vringo has shown the ability to draw on institutional money and it isn't backing down anytime soon.

Get ready for a firestorm of activity to happen. We are in the calm before the storm. Look for Vringo to be providing more enforcement news throughout the year. As far as the current valuation, $3.10 could very well be a gift this week on any pre-anticipated positive Google and ZTE news updates. This stock could see $9.00-$10.00+ by year-end or sooner for those who have the patience and determination to see this litigation through completion. The fundamentals will prove my theory out with additional announcements of: verdicts, final judgments, possible settlements, running royalties, licensing agreements and additional enforcement actions on licenses brought to light in the coming weeks/months. Please stay tuned.

Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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